Is Bank of America a Buy After Earnings?
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Bank of America (NYSE: BAC) issued disappointing financials for the first quarter of 2013 on April 17. Earnings per share came in at $0.20, which missed analyst expectations of $0.22. While this was an increase in percentage terms, it still left the bank in a questionable value situation -- annualizing the $0.20 per share figure gives a P/E multiple of 14, well above that of many large banks -- and Bank of America reported a decline in revenue compared to the first quarter of 2012 as well.
The bank has been an arguable value play for some time, with the case largely resting on the fact that the stock trades at a large discount to the book value of its equity. Currently, the P/B ratio is 0.6. In theory, this would limit Bank of America’s downside -- the stock should not fall too far below book value -- and over time, the market cap should rise (or book values be written down, or some combination of the two).
Wall Street analysts have been forecasting significant improvement in the bottom line over the next couple years as Bank of America cuts costs, with the result being a forward price-to-earnings multiple of only 9.
Bank of America had been one of the most popular financial stocks among hedge funds in the fourth quarter of 2012, though other large banks such as Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) had at least as many hedge funds and other notable investors report a position.
Billionaire Kerr Neilson’s Platinum Asset Management owned over 37 million shares at the end of December, making Bank of America its largest holding by market value. Adage Capital Management, managed by Phil Gross and Robert Atchinson, increased its stake by over 120% during Q4 to a total of almost 27 million shares (see Adage's stock picks).
Citigroup has a similar investment thesis to Bank of America, in that investors do not currently have much confidence in its balance sheet, and so, the P/B ratio is fairly low (that metric is 0.8 here). Citi reported somewhat strong numbers in the first quarter of 2013, with revenue up 10% and net income up 30% versus a year earlier. It trades at 9 times forward earnings estimates, though that figure is dependent on earnings per share being a bit higher this year than in 2012.
JPMorgan Chase combines a smaller discount to book value, with the fact that it only needs to maintain its current business to prove undervalued, with a trailing P/E of 8. While revenue grew only slightly in its last quarterly report compared to the first quarter of 2012, it doesn’t need to improve by much and earnings were actually up.
We can also compare Bank of America to Wells Fargo (NYSE: WFC) and to Morgan Stanley (NYSE: MS). Wells Fargo is seen as a more stable megabank, with the result being that its market capitalization is actually significantly higher than book value with a P/B ratio of 1.3. However, because Wells Fargo has been so good at generating income from these assets, its current price represents a trailing P/E of only 10, and it might be worth its premium to some other banks.
Morgan Stanley, a pure play investment bank, matches Bank of America’s forward P/E of 8. However, that company has been experiencing losses in some of its recent quarters, and until it becomes more stable in terms of profitability, we would avoid it.
Bank of America doesn’t seem as good a buy as JPMorgan Chase, and possibly Wells Fargo and Citigroup as well. While the book value of its equity is considerably higher than where the market is currently pricing the company, in terms of earnings, it has been struggling while some of its peers have delivered stronger financial performance. Those banks might be better places to start looking for value in the financial sector at this time.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has long positions in C and MS. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!